Girvan (Inspector of Taxes) v Orange Personal Communications Services Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 30 September 1997 |
| Date | 30 September 1997 |
| Court | Special Commissioners |
special commissioners decision
Mr Paul de Voil and Dr AN Brice.
David Goldberg QC of counsel instructed by Linklaters and Paines for the taxpayer.
Mr Richard Walters, of the Office of the Solicitor of Inland Revenue, for the Crown.
Corporation tax - Interest - Year in which arising - Deposits made in 1990 on terms that interest credited quarterly - Later agreed that no further interest to be credited until 1 January 1993 or earlier closing of accounts - Accounts closed on 18 December 1992 and accrued interest credited - Whether interest was "income arising" on 18 December 1992 or on each quarter day of the period of the deposits - All interest arose when credited on 18 December 1992 - Appeal allowed - Income and Corporation Taxes Act 1988Income and Corporation Taxes Act 1988, s. 64.
1. Orange Personal Communications Services Limited (the Appellant) appeals against parts of two assessments to corporation tax relating to the years ending on 31 December 1990 and 31 December 1991. The relevant parts of the assessments were raised because the Inland Revenue were of the view that interest credited to the Appellant's bank account on 18 December 1992 was "income arising" during 1990 and 1991 as well as during 1992.
2. Section 18(3) of the Income and Corporation Taxes Act 1988 (the Taxes Act) provides that income tax is charged under Case III of Schedule D in respect of "any interest of money whether yearly or otherwise…whether the same is received and payable half-yearly or at any shorter or more distant periods".
3. Section 64 of the Taxes Act provides:
…income tax under Case III of Schedule D shall be computed on the full amount of the income arising within the year preceding the year of assessment, and shall be paid on the actual amount of that income, without any deduction.
4. Section 70(1) of the Taxes Act provides that, for the purposes of corporation tax, income shall be computed under Case III of Schedule D on the full amount of the income arising in the period.
5. On 12 March 1990 the Appellant deposited money at a bank on terms that interest would be credited to the account quarterly. Interest was so credited on 26 March 1990 but, before the June quarter's credit was due, the Appellant agreed with the bank that further credits would be deferred. The account was closed on 18 December 1992 and the interest was credited on that day. The Inland Revenue assessed the Appellant to corporation tax on the basis that the interest was "income arising" in the years ending on 31 December 1990 and 31 December 1991 as well as 31 December 1992. The Appellant argued that the interest was income arising on the date that it was credited, namely 18 December 1992, and should all have been assessed to tax in the year ending on 31 December 1992.
6. Accordingly, the issue for determination in the appeal was whether the interest credited on 18 December 1992 was income arising in the year ending on 31 December 1992 (as argued by the Appellant) or whether it was income arising in each of the years ending on 31 December 1990, 31 December 1991 and 31 December 1992, as argued by the Inland Revenue.
7. At the hearing five volumes of documents, including a Statement of Agreed Facts, were produced on behalf of the Appellant; not all the documents were referred to at the hearing. Oral evidence was given on behalf of the Appellant by:
Mr Graham Darsley; Mr Darsley is a chartered accountant and, at the relevant time, was the Financial Controller of Microtel Communications Ltd, the previous name of the Appellant; and
Mr Roger Shorland; Mr Shorland is an Associate of the Institute of Bankers and is now, and was at the relevant time, a Senior Corporate Manager for the Bristol Region of Barclays Bank where the deposit accounts were held.
8. From the evidence before us we find the following facts.
9. The Appellant was incorporated in 1989 with the name of Microtel Communications Ltd and with the object of designing, constructing and operating a personal communications network for mobile telephone communication services in the United Kingdom; at all material times its registered office was at Bristol. The Appellant was initially owned by a consortium of four other companies and, in order to fund the development of the network, each consortium member injected funds by way of share capital. Work on the network was delayed and the funds were not required immediately and so were placed on deposit with the Bristol branch of Barclays Bank.
10. On 12 March 1990 the funds were transferred to Business Premium Account number 40636681 and High Interest Business Account number 10636703, both of which accounts were opened on that day. The Business Premium Account was a high interest, no notice account with a maximum deposit of £1M. The High Interest Premium Account was a high interest, fourteen day notice account with no maximum for deposits. We call these two accounts "the deposit accounts". The terms of both deposit accounts were that interest would be paid quarterly. The interest for the quarter ending on 25 March 1990 was credited to each account on 26 March 1990 and taxed in the year ending on 31 December 1990. The tax on that interest is not in issue in this appeal.
11. Mr Darsley joined the Appellant as Financial Controller in June 1990 and realised that substantial sums of interest were being earned on the deposit accounts. He recognised that, although significant expenditure was being incurred by the Appellant, tax relief for that expenditure would not be available until the Appellant started trading and the commencement of trading was being deferred for a number of reasons. He therefore had conversations with Barclays Bank requesting that the terms of the deposit accounts be amended. On 13 June 1990 he wrote asking that the deposit interest be "rolled up" and that "compound interest will also be accrued". He explained that the purpose of this change was so that tax would not be payable until the interest was paid, although the Appellant would account for accrued interest within its usual financial reporting. Barclays Bank wrote on 22 June 1990 to confirm that interest would be "suppressed" until March 1991, although the accumulated interest would be available in either June or December if requested; the full benefit of compounding would be available. In evidence which we accept Mr Shorland said that the use of the word "suppressed" was unfortunate when what was meant was that interest would be deferred. Mr Darsley wrote further on 26 June to say that March 1991 would be too early and asked for the date of payment to be 1 January 1993. He also asked for a note of accrued interest to be provided at quarterly intervals.
12. On receipt of Mr Darsley's letter of 26 June 1990 consultations took place within Barclays Bank as to the best means of complying with his request. One difficulty arose from the fact that each branch of Barclays Bank had its own profit and loss account; if interest were to be accumulated throughout the rest of 1990, and during 1991 and 1992, credit balances at the Bristol branch would be increased in those years but there would then be a significant reduction in the profits of the branch when the interest was paid in January 1993. A solution to this difficulty was found by arranging for the branch to debit its profit and loss account, and to credit its "sundry creditors" account, each December with the accrued interest. So, on 28 August 1990, Barclays Bank wrote to the Appellant to say that interest could be deferred until demanded or until the account was closed and on 5 September 1990 the Appellant confirmed that that was in accordance with its wishes.
13. However, within Barclays Bank another difficulty then emerged and that was how to ensure that the Appellant received compound interest on the deferred interest payments. As the interest was to be credited to "sundry creditors" a system had to be devised to identify the amount of interest accrued to the Appellant and then to accrue interest on that interest. A solution was found by Barclays Bank to this problem on 2 November 1990 when two suspense accounts, called respectively Barclays Bank Plc Interest Suspense Account BPA number 10636711 and Barclays Bank Plc Interest Suspense Account HIBA number 50636738, were opened. Amounts equivalent to the interest earned on the Business Premium Account number 40636681 in June 1990 and September 1990 were credited to the BPA suspense account, together with interest on the June 1990 interest which had become due in September 1990. And amounts equivalent to the interest earned on High Interest Business Account number 10636703 in June 1990 and September 1990 were credited to the HIBA suspense account, together with interest on the June 1990 interest which had become due in September 1990.
14. By an exchange of letters between 8 November 1990 and 29 January 1991 the Appellant and Barclays Bank agreed that no interest would be credited to the deposit accounts before 1 January 1993 or closure of either account before that date. In December 1990, and thereafter each quarter, the suspense accounts were credited with amounts equivalent to the interest which had been earned on the deposit accounts that quarter, together with interest on the accumulated interest in the suspense accounts. On 4 January 1991, and thereafter at intervals, Barclays Bank wrote to the Appellant and gave the figures for the compounded interest which had accrued on the deposit accounts. In evidence which we accept, Mr Darsley told us that standard accounting practice required that, for the purposes of the management and annual accounts, all income had to be calculated on an accruals basis and the date of payment was not relevant in that context.
15. In evidence which we accept Mr Shorland told us that the suspense accounts were purely for...
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